Panel: Behavioral Economics, Literacy, and Financial Decision-Making
(Public Finance)

Friday, November 9, 2012: 9:45 AM-11:15 AM
Jefferson (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Organizers:  Saurabh Bhargava, Carnegie Mellon University
Moderators:  Janet Holtzblatt, Congressional Budget Office and Shanthi Ramnath, U.S. Department of the Treasury
Chairs:  Susan Dynarski, University of Michigan

Can small changes in the choice context affect the optimality of financial decisions? A series of papers, drawing from findings in psychology and behavioral economics, investigates this question across three distinct decision-making domains: retirement savings, financial aid, and the take-up of social benefits. A fourth paper illuminates the role that financial literacy and numeracy play in shaping such decisions. First, in a paper entitled, Choi et al. examine the role of small cues in the decision to save. The authors anchoring, goal setting, or savings threshold cues in emails to employees about their 401(k) savings plan. The paper finds that anchors increase or decrease 401(k) contribution rates by up to 1.4% of income. A high savings goal example raises contribution rates by up to 2.2% of income. Highlighting a higher, relative to a lower, savings threshold in the match incentive structure raises contributions by up to 1.5% of income. Highlighting the maximum possible contribution rate raises contribution rates by up to 2.9% of income among low savers. In a second project, Judith Scott-Clayton discusses the role of complexity and informational constraints in financial aid decisions. One justification for public support of higher education is that prospective students, particularly those from underprivileged groups, lack complete information about the costs and benefits of a college degree. Students may also lack information about what they need to do academically to prepare for and successfully complete college. College aid programs have typically paid little attention to information constraints, and the complexity of some programs can exacerbate the problem. Judith describes the information problems facing prospective students as well as their consequences, drawing upon economic theory and empirical evidence. Next, Saurabh Bhargava (w/ Day Manoli) investigate why some eligible individuals fail to collect EITC benefits. Using a unique field experiment, they test the role of program information, informational complexity, and stigma on response to a set of experimental IRS mailings that notify 35,050 individuals of over $26 million in owed benefits. They find increases in take-up due to the mere receipt of a mailing (response of 0.14); simplification (+0.09 relative to 0.14); and the display of benefit information (+0.08 relative to the 0.23 simplified baseline). They authors calculate that the treatments, if applied to all filing non-claimants, could reduce overall incomplete take-up from 25% to 22%. Finally, Annamaria Lusardi discusses the role of numeracy and financial literacy in shaping response in financial decisions. Financial decisions, be they related to asset building or debt management, require the capacity to do calculations, including some complex ones. But how numerate are individuals, in particular when it relates to financial decisions? Studies show the level of numeracy, both in the US and abroad, to be very low. Moreover, lack of numeracy is not only widespread but is particularly severe among some demographic groups, such as women, the elderly, and those with low educational attainment. This has potential consequences for individuals and for society as a whole because numeracy is found to be linked to many financial decisions.

Small Cues Change Savings Choices
James Choi1, Emily Haisley2, Jennifer Kurkoski3 and Cade Massey1, (1)Yale University, (2)Barclays Bank, (3)Google Inc.

Information Constraints and Financial Aid Policy
Judith Scott-Clayton, Teachers College, Columbia Univ.

Assessing the Role of Information, Complexity, and Stigma On Take-up with An IRS Field Experiment
Saurabh Bhargava, Carnegie Mellon University and Day Manoli, University of Texas, Austin

Numeracy, Financial Literacy, and Financial Decision-Making
Annamaria Lusardi, George Washington University

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